Mutual Morning Mutterings

Quote of the day…

“If the Dow Jones ever falls more than 1000 “points” in a Single Day the sitting president should be “loaded” into a very big cannon and Shot into the sun at TREMENDOUS SPEED! No Excuses!” Donald J. Trump, 25 Feb 2015.

Themes … ”Holy plunging stock-markets Batman …”

Overview – a shorter note today as I have to rush off to the airport soon – conference in Sydney to attend.  Well, what a night!  That was the session I’ve been worried about for the past two or three weeks, and to be honest, it was just a matter of time.  With a surge in coronavirus cases and deaths outside China (Italy, Iran & South Korea) global health authorities are now being confronted with the increasing prospect of a world-wide pandemic…although the WHO has not officially declared such.  Either way, risk assets were belted six-ways from Sunday overnight.  It was trousers down, six of the best with a particularly gnarly switch….and it’s off to bed with no supper!   Northern Hemisphere markets factored in the weekend’s coronavirus headlines and began discounting macro data that covered pre-virus periods.  It was safe haven assets or bust with stock-markets waking up to what bond markets have been signalling for several weeks now, all is not well in the world.

Stocks – European bourses took a smack to the back of the head with a piece of lumber, down 3% – 5%.  Although, with the exception of the FTSE and CAC, all are European bourses still clinging to MTD gains…for now, but YTD it’s grim, all down.  In the US, stocks weren’t spared the rod either, down 3.3% when I dragged my sorry backside out of bed this morning, but have clawed back some of these losses to be down 3.1% as we go to print.  This represents the third consecutive down day for the S&P 500, for a cumulative loss of 4.3%.  Technicals have been turned on their head.  The S&P 500 has broken through key support measures – MACD is indicating a ‘negative divergence’, which is a ‘sell’ signal.  Volatility measures spiked with VIX up to 24.4% v 12m average of 15%.   After a -2.3% down day yesterday, the ASX 200 futures are down a further 2.0% and the index is now in the red MTD (-0.6%).  YTD, we’re still up +4.4%, so realistically the virus impact has still been relatively muted so far…give it time.

Bonds – a strong rally in treasuries with US 10-year yields testing all time ding-dong lows, down 10 bps as I smash away at the keyboard – they were down 12 bps at one stage.  US 10’s are yielding 1.367%, just a gnats hind leg away from the 1.3579% all-time low set in July 2016.  US 2’s rallied aggressively also, the curve is unchanged around ~12 bps.  Other sovereign bonds were also well bid with BUNDS, OATS, and GILTS 3 – 5 bps lower in their 10-year yields.    If the tone set last night persists, it’s just a matter of time before new record lows are set, although it is arguably a touch call.

Credit – credit investors took some chips off the table overnight given the virus uncertainty.  In synthetics the US CDX index was +6 bps wider, a meaningful move in the context of recent trends, i.e. it’s a 13% move.  MAIN (EU) performed marginally better, but only just, +5 bps wider on the session.  Snr Fins are +7 bps wider, while Sub Fins were well and truly taken to the cleaners, +15 bps wider.  In cash, the heightened sense of concern and alarm saw five USD issuers stand down and walk away from their issuance plans on the day.  Heavy supply (last week) and the strong risk-off tone has taken the jam out of the market’s donut.  Investors are also taking a step back.  In AUD, I’d expect traders to step back a bit and not really a seller’s market for the time being.  Spreads might drift wider in sympathy, but I doubt we’ll see any meaningful volumes trade.

Data & Events – a couple of second tier data prints out of the US, but they gained very little coverage.  Most market participants were busy running for cover, diving into trenches.  It’s a busy night tonight in the US, which may or may not add fuel to this sell off, which is three days old now.  Tonight we have US housing data and consumer confidence (consensus 132.1 vs 131.6 last).  Light data locally.

So, what’s it all mean Basil? – well, it’s either the start of a meaningful correction (>10% downside), or the ‘buy-the-dip posse’ and their affiliates, the ‘FOMO Funky Bunch’, will come bounding over the horizon on a glistening steed and save markets from further pain and suffering.  Chinese authorities continue to emphasise their willingness to throw money at the problem to support the real economy and last night’s shenanigans provide rate cut fuel for the likes of the Fed, and dare I say it the RBA.  The sell off has some momentum, but it could be short lived…stay cautious for mine, there’s potentially more pain to come.

This day in history – 25 February 1836 – Samuel Colt patents the first multi-shot revolving cylinder revolver.  “God created all men, but Samuel Colt made them equal.”

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Contact:

Scott Rundell, Chief Investment Officer

T: +61 3 8681 1907

E: Scott.Rundell@mutualltd.com.au

W: www.mutualltd.com.au

Interest Rate Futures

• 3m Bank Bills – implied yield 0.89%
• 3yr Govt Bond down 1pt– implied yield 0.63%
• 10yr Govt Bond down 2pts– implied yield 0.92%
• 20yr Govt Bond down 3pts– implied yield 1.20%

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